CHARLIE MUNGER ON THE PSYCHOLOGY OF HUMAN MISJUDGMENT

Speech at Harvard University Estimated date: June, 1995
Transcription, comments [in brackets] and minor editing by Whitney Tilson (feedback@tilsonfunds.com) Moderator: ... and they discovered extreme, obvious irrationality in many areas of the economy that they looked at. And they were a little bit troubled because nothing that they had learned in graduate school explained these patterns. Now I would hope that Mr. Munger spends a little bit more time around graduate schools today, because we've gotten now where he was 30 years ago, and we are trying to explain those patterns, and some of the people who are doing that will be speaking with you today. So I think he thinks of his specialty as the Psychology of Human Misjudgment, and part of this human misjudgment, of course, comes from worrying about the types of fads and social pressures that Henry Kaufman talked to us about. I think it's significant that Berkshire Hathaway is not headquartered in New York, or even in Los Angeles or San Francisco, but rather in the heart of the country in Nebraska. When he referred to this problem of human misjudgment, he identified two significant problems, and I'm sure that there are many more, but when he said, "By not relying on this, and not understanding this, it was costing me a lot of money," and I presume that some of you are here in the theory that maybe it's costing you even a somewhat lesser amount of money. And the second point that Mr. Munger made was it was reducing ... not understanding human misjudgment was reducing my ability to help everything I loved. Well I hope he loves you, and I'm sure he'll help you. Thank you. [Applause] Munger: Although I am very interested in the subject of human misjudgment -- and lord knows I've created a good bit of it -- I don't think I've created my full statistical share, and I think that one of the reasons was I tried to do something about this terrible ignorance I left the Harvard Law School with. When I saw this patterned irrationality, which was so extreme, and I had no theory or anything to deal with it, but I could see that it was extreme, and I could see that it was patterned, I just started to create my own system of psychology, partly by casual reading, but largely from personal experience, and I used that pattern to help me get through life. Fairly late in life I stumbled into this book, Influence, by a psychologist named Bob Cialdini, who became a super-tenured hotshot on a 2,000-person faculty at a very young age. And he wrote this book, which has now sold 300-odd thousand copies, which is remarkable for somebody. Well, it's an academic book aimed at a popular audience that filled in a lot of holes in my crude system. In those holes it filled in, I thought I had a system that was a good-working tool, and I'd like to share that one with you. And I came here because behavioral economics. How could economics not be behavioral? If it isn't behavioral, what the hell is it? And I think it's fairly clear that all reality has to respect all other reality. If you come to inconsistencies, they have to be resolved, and so if

there's anything valid in psychology, economics has to recognize it, and vice versa. So I think the people that are working on this fringe between economics and psychology are absolutely right to be there, and I think there's been plenty wrong over the years. Well let me romp through as much of this list as I have time to get through: 24 Standard Causes of Human Misjudgment. 1. First: Under-recognition of the power of what psychologists call 'reinforcement' and economists call 'incentives.' Well you can say, "Everybody knows that." Well I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther. One of my favorite cases about the power of incentives is the Federal Express case. The heart and soul of the integrity of the system is that all the packages have to be shifted rapidly in one central location each night. And the system has no integrity if the whole shift can't be done fast. And Federal Express had one hell of a time getting the thing to work. And they tried moral suasion, they tried everything in the world, and finally somebody got the happy thought that they were paying the night shift by the hour, and that maybe if they paid them by the shift, the system would work better. And 10 and behold, that solution worked. Early in the history of Xerox, Joe Wilson, who was then in the government, had to go back to Xerox because he couldn't understand how their better, new machine was selling so poorly in relation to their older and inferior machine. Of course when he got there he found out that the commission arrangement with the salesmen gave a tremendous incentive to the inferior machine. And here at Harvard, in the shadow ofB.F. Skinner -- there was a man who really was into reinforcement as a powerful thought, and, you know, Skinner's lost his reputation in a lot of places, but if you were to analyze the entire history of experimental science at Harvard, he'd be in the top handful. His experiments were very ingenious, the results were counterintuitive, and they were important. It is not given to experimental science to do better. What gummed up Skinner's reputation is that he developed a case of what I always call man-with-a-hammer syndrome: to the man with a hammer, every problem tends to look pretty much like a nail. And Skinner had one of the more extreme cases in the history of Academia, and this syndrome doesn't exempt bright people. It's just a man with a hammer ... and Skinner is an extreme example of that. And later, as I go down my list, let's go back and try and figure out why people, like Skinner, get man-with-a-hammer syndrome. Incidentally, when I was at the Harvard Law School there was a professor, naturally at Yale, who was derisively discussed at Harvard, and they used to say, "Poor old Blanchard. He thinks declaratory judgments will cure cancer." And that's the way Skinner got. And not only that, he was literary, and he scorned opponents who had any different way of thinking or thought anything else was important. This is not a way to make a lasting reputation if the other people tum out to also be doing something important. -2-

where it creates what economists call 'agency costs. -3- . but in lesser strength. you couldn't get that organ out rapidly enough. if you turn on the television. 3. which make most [dishonest] behavior hard. and people sold him a couple of cash registers and it went to profit immediately.. but a lot ofthe way the world is run.' causes this terrible abuse. And. about five years after he should've been removed from the staff. and that is that people who create things like cash registers. And with that quality control for which community hospitals are famous. he was. the government's right. and the people were stealing him blind and never made any money.this guy was very skilled technically-. I'm 70 years old. terrible behavior: after the Defense Department had had enough experience with cost-plus percentage of cost contracts. This first really hit me between the eyes when a friend of our family had a super-athlete. He thought that the gall bladder was the source of all medical evil.. He had a little store. super-student son who flew off a carrier in the north Atlantic and never came back. I've never seen one I thought was even within hailing distance of objective truth. 'Here's a way for me to exercise my talents" -. And many of the people who are doing it you would be glad to have married into your family compared to what you're otherwise going to get. And. Third: incentive-cause bias. just never believed that he was dead. The reality is too painful to bear. We all do that to some extent. and not only a crime. my early experience was a doctor who sent bushel baskets full of normal gall bladders down to the pathology lab in the leading hospital in Lincoln. by the way." Now that's an extreme case. "Hell no. who was a very sane woman. and they all think their sons are innocent. and it's a common psychological misjudgment that causes terrible problems. [Laughter] Now there are huge implications from the fact that the human mind is put together this way. but a felony. did he think. along with some frauds?" And he said. of course.. and his mother. And it causes perfectly terrible behavior. you'll find the mothers of the most obvious criminals that man could ever diagnose. Charlie.' Here. are some ofthe effective saints of our civilization. "Tell me. And human nature. they've still got a cost-plus percentage of cost system..2. and if you really love your patients. both in one's own mind and that of ones trusted advisor. he closed the store and went into the cash register business . the reaction of our republic was to make it a crime for the federal government to write one. And one of the old doctors who participated in the removal was also a family friend."'and make a high living by doing a few maimings and murders every year. If you want to talk about the power of incentives and the power of rationalized. with its version of what I call 'incentive-caused bias. so you just distort it until it's bearable. And by the way. My second factor is simple psychological denial. including most law firms and a lot of other places. Nebraska. If you take sales presentations and brokers of commercial real estate and businesses . And the cash register was a great moral instrument when it was created. of course. it's present in every profession and in every human being. And Patterson knew that. and I asked him: I said. That's simple psychological denial.

That worked way better than torture. indeed. Fourth. it catches the deans of physics. you're pounding it into your own head. And. 1'd say 3/4 of advertising works on pure Pavlov. Many ofthese students that are screaming at us. and the association really works. which is a pure psychological phenomenon demonstrated in the laboratory. 4. was way better than anybody else's. Somehow incentive-caused bias has escaped the standard survey course in psychology. They don't want to be associated with presidents' funerals and soforth. misconstruing past correlation as a reliable basis for decision-making. but I did learn about Pavlov in high school biology. you will find that if they're 1. including the tendency to avoid or promptly resolve cognitive dissonance. you can imagine what the crowd that you and I are part of behaves like. pure association. Fifth: bias from Pavlovian association. important new physics was never really accepted by the old guard. or economics either for that matter. According to Max Planck. you name it.. And I think educational institutions that create a climate where too much of that goes on are . wonderful music. Practically . 5. They want to be associated with every wonderful image: heroics in the Olympics.And so this is a huge. they aren't convincing us. you know. And the way they taught it. and this is a superpower in error-causing psychological tendency: bias from consistency and commitment tendency. and then they'd slowly build. And here again. it shuts down so the next one can't get in.000 pages long.in a fundamental sense. the really innovative. there's one sentence. and with a special persistence for conclusions that are hard-won. in economics we wouldn't have money without the role of so-called secondary reinforcement. Well what I'm saying here is that the human mind is a lot like the human egg.. but they're forming mental change for themselves. they're irresponsible institutions.. And of course. Think how association. And all these things like painful qualifying and initiation rituals pound in your commitments and your ideas. When have you seen a Coca-Cola ad . because what they're shouting out [is] what they're pounding in.. which was for war prisoners. you know. If you read the psychology texts. When one sperm gets in. -4- . it doesn't just catch ordinary mortals. important thing. Take Coca-Cola company (we're the biggest share-holder). And if Max Planck's crowd had this consistency and commitment tendency that kept their old inclusions intact in spite of disconfirming evidence. and the human egg has a shut-off device. if you make a public disclosure of your conclusion. Well the truth of the matter is that Pavlovian association is an enormously powerful psychological force in the daily life of all of us. Instead a new guard came along that was less brain-blocked by its previous conclusions. The human mind has a big tendency of the same sort. I never took a course in psychology.. particularly expressed conclusions. The Chinese brainwashing system. so the dog salivated when the bell rang. works. They maneuvered people into making tiny little commitments and declarations. So what? Nobody made the least effort to tie that to the wide world. Includes the self-confirmation tendency of all conclusions. . It's very important to not put your brain in chains too young by what you shout out.

Now you've got bios from Skinnerian association: operant conditioning. suppose they're complex. [Paley was the former owner. If you take Westinghouse. But here's a few hundred million dollars you thought you had that you don't. we all know people who are the human equivalents of superstitious pigeons. if product Y costs X minus something." but that was fairly late in economics that they found such an obvious thing. and virtually 100% loans? Now you say any idiot knows that if there's one thing you don't like it's a developer. Talking about economics. of course. operant conditioning really works. did he make some dumb decisions in the last 20 years. and boy. under the laws of economics. And to make a 100% loan to a developer who's going -5- . it'll get a larger market share than it would when you make it lower than your competitor's product.kcmetro. In many cases when you raise the price of the alternative products. Where you see in business just perfectly horrible results from psychologically-rooted tendencies is in accounting.cc. And. with armies of lawyers and experts on each side. where you give the dog a reward and pound in the behavior that preceded the dog's getting the award. And. I mean the people in the center who think that operant conditioning is important are very much right. of course.mo. Well one of the things that causes it is pure old Pavlov and his dog. That's because the bell. of course. That happens again and again and again. Now this is a Mad Hatter's tea party: two engineering-style companies can't resolve some ambiguity without spending tens of millions of dollars in some Texas superior court? In my opinion what happens is that nobody wants to bring the bad news to the executives up the line. which blew. "Well. Now you've got Persian messenger syndrome. two or three billion dollars pre-tax at least loaning developers to build hotels. a Pavlovian bell-.htm ] He didn't hear one damn thing he didn't want to hear. technical products. and this is a great big enterprise. of course. which makes them very insidious. That's a very powerful phenomenon. It's a pure Pavlovian phenomenon. The Persians really did kill the messenger who brought the bad news. that if product A costs X. you get a very interesting phenomenon that I've seen over and over again in a long life. it's just that Skinner overdid it a little. You think that is dead? I mean you should've seen Bill Paley in his last 20 years. Arco and Exxon arguing over a few hundred millions of ambiguity in their North Slope treaties before a superior court judge in Texas. And so when you raise the price. and another you don't like it's a hotel. most of them don't ask what causes the information inefficiencies. I saw. the economists have figured this sort of thing out when they started talking about information inefficiencies.I mean ordinarily there's a correlation between price and value -. chairman and CEO of CBS. you know.then you have an information inefficiency. what. some years ago.And all these psychological tendencies work largely or entirely on a subconscious level. Skinner was able to create superstitious pigeons by having the rewards come by accident with certain occurrences. And. And it's much safer to act like the Persian messenger who goes away to hide rather than bring home the news of the battle lost. And now the Persian messenger syndrome is alive and well. it will sell better than if it sells at X plus something. and. Well that means that the leader gets in a cocoon of unreality. his bio is at http://www.us/pennvalleylbiologyllewis/crosby/paley. You've got two products. the sales go up relative to your competitor. but that's not so. You can say. Now you'd think. People knew that it was bad for the messenger to bring Bill Paley things he didn't want to hear.

But after he'd made the first request.. would you devote two afternoons a week to taking juvenile delinquents somewhere and suffering greatly yourself to help them. The truth of the matter is the accounting system was such that by punching a few buttons. he said. That would never have been possible ifthe accounting system hadn't been such but for the initial phase of every transaction it showed wonderful financial results. and the bad behavior would spread. Well the Joe Jetts are always with us. And it was a campus. what happened with Joe Jett and Kidder Peabody. And on this so-called role theory. . it's an absolute sin. reciprocation tendency is a very. in my judgment at least. you will immediately order copies for all of your children and several of your friends. where any damned way of getting Westinghouse to do it was considered normal business. that would be a considerable human sin. and they're not really to blame. and they just blew it. Sixth: bias from reciprocation tendency. 6. and profits that showed up in things that resulted in rewards and esteem and every other thing. so far as I know. at least nobody I've seen. he probably was an engineer or something. And if you have half as much sense as I think you do. Well here. and Cialdini demonstrated this by running around a campus. very powerful phenomenon. again. -6- . So people who have loose accounting standards are just inviting perfectly horrible behavior in other people.. "You're like a one-legged man in an ass-kicking contest. I always use the phrase. including the tendency of one on a roll to act as other persons expect. he backed up a little." I mean you are really giving a lot of quarter to the external world that you can't afford to give." and there he got 100% ofthe people to say no. on a subconscious level. Cialdini does a magnificent job at this.. At any rate. [Laughter] But this guy. because you'd be causing a lot of bad behavior. as Westinghouse has so wonderfully proved. ought to be. You will never make a better investment. "Gee. and he said. But that bastard who created that foolish accounting system who. And after he'd accumulated a statistical output he went around on the same campus and he asked other people. and you're all going to be given a copy of Cialdini' s book. and so one in six actually agreed to do it. and that's reciprocation if you think about the way society is organized. and he didn't take psychology any more than I did. and he got out there in the hands of these salesmen operating under their version of incentive-caused bias. can be manipulated that way and you don't know it. and he asked people to take juvenile delinquents to the zoo. "Would you at least take them to the zoo one afternoon?" He raised the compliance rate from a third to a half.to build a hote1. He got three times the success by just going through the little ask-for-a-lot-and-back-off Now if the human mind. If you carry bushel baskets full of money through the ghetto. Similarly an institution that gets sloppy accounting commits a real human sin. and made it easy to steal. has not been flayed alive. where you tend to act in the way that other people expect. the Joe Jetts of the world could show profits. It is so easy to be a patsy for what he calls the compliance practitioners of this life. Oddly enough nobody mentions. and it's also a dumb way to do business. And it's a sin.

just sort of sat and did nothing while she was slowly murdered.I don't know. one of the cases the psychologists use is Kitty Genovese. the conclusions of others. and if Exxon was doing it. Also.he shared a Nobel Prize -. just because the evidence comes in differently . he said. in my judgment. In fact one of the economists who won -. this consistency and commitment tendency is affecting you.after all you do something and the market goes up and you get paid and rewarded and applauded and what have you. a wonderful economic doctrine that had a long vogue in spite of the experience of Berkshire Hathaway. ] Wherever you turn.and as he looked at Berkshire Hathaway year after year. Now one of the explanations is that everybody looked at everybody else and nobody else was doing anything. "Everybody knows that. there's social proof. 60. 70 ofthem -. if you make a bet on a market and the market goes with you. That's not a good enough explanation for Kitty Genovese. as he acted as a guard or a prisoner. what you think may change what you do.it was awesome.." I want to tell you I didn't know it well enough early enough. . what you do will change what you think. of course. 7. but it was a total disaster. and Henry Kaufman wisely talked about this: bias from over-influence by social proof -. it's a two-sigma event.prisonexp.that is. and vice versa.org. He was getting into human misery and breakdown and pathological behavior. Do you remember some years ago when one oil company bought a fertilizer company. [For more on this famous experiment. He had to stop the experiment after about five days. which people would throw in his face as saying maybe the market isn't quite as efficient as you think. In other words. one. And you can say. and so there's automatic social proof that the right thing to do is nothing. Zimbardo is greatly misinterpreted. That's only part of it. but perhaps even more important. I mean the prices on the market are the ultimate form of social proof. where all these people -. meaning a lot of reinforcement. And here. "Well. the power of reinforcement -. There are microeconomic ideas and gain/loss ratios and so forth that also come into play. It's not just reciprocation tendency and role theory that caused that. it was good enough for Mobil. reflecting what other people think. see http://www. and so the -7- . And then he said we were a four-sigma event. namely. he sank like a stone. and they started acting out roles as people expected. and every other major oil company practically ran out and bought a fertilizer company? And there was no more damned reason for all these oil companies to buy fertilizer companies. I think they're all gone now." And then he said we were a three-sigma event. it's consistency and commitment tendency. when this share of a Nobel Prize went into money management himself. psychological notions and economic notions interplay. in reality. and the man who doesn't understand both is a damned fool. Seventh. 50.better to add a sigma than change a theory. However. Big-shot businessmen get into these waves of social proof. And he finally got up to six sigmas -. I think time and time again. particularly under conditions of natural uncertainty and stress. the action itself was pounding in the idea. now this is a lollapalooza.A guy named Zimbardo had people at Stanford divide into two pieces: one were the guards and the other were the prisoners. but they didn't know exactly what to do. Each person. I mean it was . [Laughter] And. Now let's talk about efficient market theory. If you think about the doctrines I've talked about.

you would expect some waves of irrationality. and the cognition manipulators mimic the watch-removing magician." Now I don't know whether that's true about a frog. but he told me once something I really enjoyed hearing. every problem tends to look pretty much like a nail. the other seems cold because the sensation apparatus of man is over-influenced by contrast. And it works pretty well. and he has the student stick his left hand in the hot water and his right hand in the cold water. math was what they'd learned to do. "If you throw a frog into very hot water. it's got a contrast scale in it. when women lived at home until they got married. I saw some perfectly terrible marriages made by highly desirable women because they lived in terrible homes.I certainly have -. To the man with a hammer. Nine [he means eight]: what made these economists love the efficient market theory is the math was so elegant. and of course with both hands in the same bucket of water.combination is very powerful. It's the same thing. But here the great truth is that cognition mimics sensation." 9. or in 1972 or whatever it was when the Nifty 50 were in their heyday? If these psychological notions are correct. In other words. and you laugh. and he's a total intellectual amateur that lives on inherited money. and there. say even in 1973-74 at the pit. one seems hot." he say. and then you take the rube to some moderately overpriced house. Why would you expect general market levels to always be totally efficient. and they'd forgotten the great economists Keynes. which is why the real estate salesmen do it. It takes a certain percentage change before it's noticed. My favorite analogy I can't vouch for the accuracy of. you aren't. "Charlie. And the accidents of life can do this to you. He's taking advantage of contrast-type troubles in your sensory apparatus. 8. and I want to tell you. Maybe you've had a magician remove your watch -. and then you stick him. and the first thing you do is you take the rube out to two of the most awful. You think you're immune from these things. again. I have this worthless friend I like to play bridge with. it is the contrast phenomenon. and it can ruin your life. the great experiment that Cialdini does in his class is he takes three buckets of water: one's hot. And you've got the rube that's been transferred into your town. He said. Cialdini cites the case of the real estate broker. people are manipulating you all day long on this contrast phenomenon. overpriced houses you've ever seen. Here. In my generation. so they're inconsistent with reason. but if you put the frog in room temperature water and just slowly heat the water up. Then he has them remove the hands and put them both in the room temperature bucket. And I've seen some terrible second marriages which were made because they were slight improvements over an even worse first marriage. "Better to be roughly right than precisely wrong. whom I think said. which carry general levels. And it's a scale with quantum effects in it too.without your noticing it. But these -8- . the frog will die there. Nine: bias from contrast-caused distortions of sensation. The alternative truth was a little messy. And it's always going to work. And after all. the frog will jump out. perception and cognition. one's cold and one's room temperature. It has no absolute scale. but it's sure as hell true about many of the businessmen I know [laughter].

Well here. We're the major shareholder -. but they've done it in simulators. harmless dog. Eleven: bias from deprival super-reaction syndrome. I mean you may improve a detergent or something. a lovely. They have the pilot do something where the co-pilot.. you have to do something about this warp in your head where it's so misled by mere contrast.I think there have been 1. And he had a person posing as an authority figure trick ordinary people into giving what they had every reason to expect was heavy torture by electric shock to perfectly innocent fellow citizens. The only way to get that dog to bite you is to try and take something out of its mouth after it was already there. And I have a neighbor. because you don't just reciprocate affection. you reciprocate animosity. and it turned his 180 degree view of the harbor into 1793/4. And he was trying to show why Hitler succeeded and a few other things. and his next door neighbor put a little pine tree on it that was about three feet high. 11. high-powered people. The pilot is the authority figure. Bias from over-influence by authority. And then. y ou'lllike this one: You get a pilot and a co-pilot. and they'd spent the better part of 100 years getting people to believe that trademark had all these intangible values too. 25% of the time the plane crashes. and over-influence by authority . It's not quite as powerful as some people think. And so they were going to tell people not that it was improved. and the co-pilot is sitting there.. Partly it's so politically correct. you'll know that the human version of that dog is there in all of us. if you act on them. lawyers.I think we understand that trademark. I mean people are really crazy about minor decrements down. so if you're going to be a person of good judgment. and the pilot is the authority figure. A flavor is a matter of taste. They don't do this in airplanes. including threatened removal of something almost possessed. Here I took the Munger dog. including bias caused by present or threatened scarcity. And the extreme business case here was New Coke. and so this really caught the fancy of the world. and the whole thing can escalate. if you've tried to do takeaways in labor negotiations. a predecessor who had a little island around the house. advertising executives and so forth.. psychologists. you're likely to miss. and I'll get to that later. Well they had a blood feud like the Hatfields and McCoys. -9- . And people associate it with a flavor. And so huge insanities can come fromjust subconsciously over-weighing the importance of what you're losing or almost getting and not getting. but don't think you're going to make a major change in a flavor.he knows he's not to allow the plane to crash -. I mean this is a very powerful psychological tendency. then you get into reciprocation tendency. the Milgrim experiment. as it's called -. and it went on and on and on . but never possessed. but the pilot's doing it. If it comes to you in small pieces. and they had a trademark on a flavor. So they got this huge deprival super-reaction syndrome.. Coke has armies of brilliant engineers.are hot-shot.600 psychological papers written about Milgrim. 10. And you know. I mean these are not fools. because you can't improve a flavor.they have the pilot to do something where an idiot co-pilot would know the plane was going to crash. who's been trained in simulators a long time -. Coca-Cola has the most valuable trademark in the world.

two out ofthe ten commandments? Those of you who have raised siblings you know about envy. created a variable reinforcement rate for his pigeons and his mice. the tendency to distort reality so that it's endurable. Well. but it's interesting how it'll always cause this moral breakdown ifthere's any need. and then somebody draws a number by lot. Well maybe a great bridge player like Zeckhauser does. Smart people make these terrible boners. and you go to the index: envy/jealousy. a lottery. and he found that that would pound in the behavior better than any other enforcement pattern. And by the way. it's this consistency and commitment thing.. Bias from chemical dependency. People think if they have committed to it. both Goizuetta [Coke's CEO at the time] and Keough [an influential former president and director of the company] are just wonderful about it. but being Skinner. it has to be good.Pepsi was within weeks of coming out with old Coke in a Pepsi bottle. we don't have to talk about that. Well envy/jealousy made. what. After all. You get all these near misses.. Bias from mis-gambling compulsion. Well that's deprival super-reaction -10- . you get bar. true. you get big play. to a considerable extent. smart guy -. 1 mean they just joke. but that's a trained response. You have a lottery where people get to pick their number.an engineer. Perfect insanity. or tried to run a law firm or investment bank or even a faculty? I've heard Warren say a half a dozen times." He participated in every single decision -. 1. but it's an enormously powerful thing. We've all seen so much of it. and it operates. but the truth of the matter is that the devisors of these modem machines and techniques know a lot of things that Skinner didn't know. How can you not understand deprival super-reaction syndrome? But people do not react symmetrically to loss and gain. You have a lottery where you get your number by lot. "It's not greed that drives the world. which would've been the biggest fiasco in modem times. 13. you go through the psychology survey courses. For instance. he seemed to think that was the only explanation. And it happens again and again and again. "Ah hal I've explained why gambling is such a powerful. Goizuetta is a wonderful. There's some blind spots in academia.he's a wonderful guy. on the subconscious level. And by the way. Keough always says. "I must've been away on vacation. walnut. See it just aggravates what we talked about earlier in the aviator case. Then if you take the slot machines. to a very considerable extent. 12. they thought it and they acted on it. Anybody who doesn't understand it is taking on defects he shouldn't have. The minute they've picked it themselves it gets an extra validity. of course. Bias from envy/jealousy. bar. Again. Skinner made the only explanation you'll find in the standard psychology survey course.000-page book. it gets lousy play. Ordinary people. He. but envy. Well here. subconsciously affected by their inborn tendencies . addictive force in this civilization. And he says. it's blank." 1think that is. 14. and it always involves massive denial." Here again.

and boy do the people who create the machines understand human psychology. and he's expressed them to other people -. so to speak. And woe to you. by the way. And these are very. every river town. mis-gambling compulsion is a very. the reciprocal of liking distortion and the tendency not to learn appropriately from someone disliked. I have never seen -11- . every profession is a conspiracy against the laity. you can see that very brilliant people get into this almost pathological behavior.you have learned a lesson that's very useful in life. The guy tells you what is good for him. very powerful and important thing. So you're getting your advice in this world from your paid advisor with this huge load of ghastly bias. Well here. 15. one's own kind and one's own idea structures. and look at the people who are ruined by it with the aid of their stock brokers and others. Look at what's happening to our country: every Indian has a reservation. as we sit here. Or you can learn the basic elements of your advisor's trade. There are only two ways to handle it: you can hire your advisor and then just apply a windage factor. we've got hugely powerful tendencies. because it isn't so much a conspiracy as it is a subconscious. I'd just adjust for so many miles an hour wind. Bias from liking distortion." But he didn't have it quite right. I mean you've got four or five ofthese elementary psychological tendencies combining to create this man-with-a-hammer syndrome. very powerful. His professional reputation is all tied up with what he knows. "In the last analysis. and in fact they may be very small demons compared to the demons that you face. man-with-a-hammer syndrome revisited. and the tendency to be especially susceptible to being misled by someone liked. And for the high IQ-crowd they've got poker machines where you make choices. Why is manwith-a-hammer syndrome always present? Well if you stop to think about it. And he believes his own idea structures will cure cancer. Once you realize that you can't really buy your thinking -. Skinner. Disliking distortion. with the machine. He doesn't recognize that he's doing anything wrong any more than that doctor did when he was pulling out all those normal gall bladders. psychological tendency. By and large it works terribly. it's incentivecaused bias. bias from that. And again. again.partly you can. but largely you can't in this world -. and he believes that the demons that he's the guardian against are the biggest demons and the most important ones.consistency and commitment tendency. So you can play blackjack. like I used to do when I was a rifle shooter. if you look in the standard textbook of psychology you'll find practically nothing on it except maybe one sentence talking about Skinner's rats. and if you look at the wars in part of the Harvard Law School. But at any rate.F. He likes himself and he likes his own ideas. because if you learn just a little then you can make him explain why he's right. basic. subconscious psychological tendencies. or at least party subconscious.syndrome. You don't have to learn very much. It's wonderful what we've done with our computers to ruin the civilization. George Bernard Shaw had a character say in The Doctor's Dilemma. That is not an adequate coverage of the subject. And those two tendencies will take part of the warp out of the thinking you've tried to hire done. Now let's get back to B. including the tendency to especially like oneself.

Here I think we should discuss John Gutfreund. and there I'm mimicking some very eminent psychologists [Daniel] Kahneman. I'll never do it again. When the brain should be using the simple probability mathematics of Fermat and Pascal applied to all reasonably obtainable and correctly weighted items of information that are of value in predicting outcomes. I don't like it for my personal system except as part of a greater sub-system. "I've never done it before. which I'm going to come to next. And the man immediately says. I mean ask the Coca-Cola Company. and it was really equivalent to forgery. a tendency to overweigh conveniently available information and other psychologically misrouted thinking tendencies on this list. which is you've got to think the way Zeckhauser plays bridge. And they are very substantially right. And I want to train myself to kind of mentally run down the list instead of just jumping on availability. Eikhout[?] (I hope I pronounced that right) and [Amos] Tversky. So I think it's much better to have a whole list of things that would cause you to be less like Zeckhauser than it is just to jump on one factor. what kind of a government can it be? -12- . In a sense these psychological tendencies make things unavailable. Or if something is very vivid. which will be taught in every decent professional school for at least a full generation." And of course it was obvious that he was trying to help the government as well as himself. Now. So that's why I state it the way I do. the extravividness creates the unavailability. who raised the idea of availability to a whole heuristic of misjudgment. I mean availability does change behavior and cognition. If availability changes behavior.a management consultant's report in my long life that didn't end with the following paragraph: "What this situation really needs is more management consulting. Nonetheless. All the things on this list distort judgment. It was an isolated example. you will drink a helluva lot more Coke ifit's always available. I mean. Seventeen [he means 16]: bias from the non-mathematical nature of the human brain in its natural state as it deal with probabilities employing crude heuristics. Gutfreund has a trusted employee and it comes to light not through confession but by accident that the trusted employee has lied like hell to the government and manipulated the accounting system. I always turn to the last page. boom. Of course Berkshire doesn't hire them. and is often misled by mere contrast. And the reason that the thing that really matters is now unavailable and what's extra-vivid wins is. the right way to think is the way Zeckhauser plays bridge. so I only do this on sort of a voyeuristic basis. which has raised availability to a secular religion. And your brain doesn't naturally know how to think the way Zeckhauser knows how to play bridge. and then because you jumped to it the consistency and commitment tendency makes you lock in. that's error number one. Sometimes I'm at a non-profit where some idiot hires one. because if you quickly jump to one thing. It's just that simple. you notice I put in that availability thing. that will really pound in. because he thought the government had been dumb enough to pass a rule that he'd spoken against. and after all if the government's not going to pay attention to a bond trader at Salomon. This is a very interesting human example." Never once. even though I recognize that and applaud Tversky and Kahneman. And it isn't just the lack of availability that distorts your judgment. [Laughter] 16.

When you're an old lady it isn't that glorious a life. and she'd been around 30 years and standing behind the candy counter with swollen ankles.. and Gutfreund did that when he looked into the man's eyes and forgave a colleague. And so there are a lot of psychological forces at work.. Or God knows what you look like.. you've got a whole lot of psychological factors that will cause the evil behavior to spread. and it's so easy to do. way over a billion dollars for Salomon in the very recent past." Well how likely is it that she never did it before? If you're going to catch 10 embezzlements a year. So it's very easy to misweigh the vivid evidence. because terrible behavior spreads. "Will you hold it for 15 minutes while I think about it?" And the CEO of this company -. your place is rotten.. Here's one that . At any rate. and pretty soon the whole damn . And that's life in the big city. Well now you look as though you almost wanted him to do it again.At any rate. It would be evil not to. and then you know the guy's wife. you've got incentive-caused bias. when I knew the wife and children. what are they all going to say? Well in the history of the See's Candy Company they always say. the civilization is rotten." and I said. getting into the till. and of course he had done it before and he did do it again. 17.applying what Tversky and Kahneman called baseline information -. Please help me. and it's now cost me $30 million.will be somebody who only did it this once? And the people who have done it before and are going to do it again. Gutfreund does not cashier the man. And that simple decision destroyed Jim Gutfreund. and it's a little handful of people. and there's human sympathy.500 shares. I don't think vengeance is much good. what are the chances that anyone of them -. I wouldn't do it like Gutfreund did it. I'm at least $30 million poorer as I sit here giving this little talk because I once bought 300 shares of a stock and the guy called me back and said. but this guy set a world record.. and I'm never going to do it again. and he's right in front of you.. I'll never do it again. It's not the adultery I mind. plus the fact he's part of a group that had made a lot of money for you. This is going to ruin my life. I'll never do it again. this guy has been part of a little clique that has made. You find an isolated example of a little old lady in the See's Candy Company. And I will admit that I have .I have seen a lot of vivid peculiarities in a long life... And what does she say? "I never did it before. -13- . I don't think you need the last ounce of vengeance.. But if they're just stealing from you and you get rid of them. and he's sort of asking for your help. which encourages reciprocation. you've got social proof. There I think you have to cashier. where they'd been cheating somebody else on my behalf. The truth of the matter was the situation was foolproof. I'm talking about the CEO -. well. Now we come to bias from over-influence by extra-vivid evidence. But there." And you know her children and her friends. but it isn't good. one of our subsidiaries. "I never did it before. I have paid severance pay when I fire somebody for taking a mistress on an extended foreign trip. it's the embezzlement. It's not the right way to behave. And it wasn't something where stock was generally available. what was it? Serpico? I mean you let that stuff . Now let's think it through like the bridge player.. In fact I don't think you need any vengeance. Remember .500 more.and I just mis-weighed it." And we cashier them. and there's all these psychological tendencies are working. and I turned down the extra 1. And you're rich and powerful and there she is: "I never did it before. like Zeckhauser. "I've got 1. He was soon going to be dead.

and Pavlov noted that they'd had a total reversal of their conditioned personality. creating sound generalizations developed in response to the question "Why?" Also.. temporary and permanent. It's not very hard to do. this very sophisticated. of course. the persuasion failed. cognition and knowledge.it doesn't work. Feuerstein went with him. just to remember that "Why?" is very important. "You have to report this as a matter of morality and prudent business judgment. memory. You want to persuade somebody. He told Gutfreund. and I've never met a lawyer who understood that what Pavlov found out with those dogs had anything to do with programming and de-programming and cults and so forth. "It's probably not illegal. which had all been conditioned into changed behaviors. You've got to array facts on the theory structures answering the question "Why?" If you don't do that." He said. But don't you do that. who was the general counsel with Salomon when Gutfreund made his big error. And the water receded in time to save some of the dogs. And now we get to Feuerstein. and the great Leningrad flood came and it just went right up and the dog's in a cage. The brain doesn't work that way. And he stopped. and when Gutfreund went down. And the dog had as much stress as you can imagine a dog ever having. He had all these dogs in cages. failure to obtain deserved influence caused by not properly explaining why. It ruined a considerable part of Feuerstein's life. I have never known any Freudian analyst who knew anything about the last work of Pavlov. you know. my favorite example is the great Pavlov. you really tell them why. -14- . [who] was a member of the Harvard Law Review. . Stress-induced mental changes. but you have to do it as a matter of prudent conduct and proper dealing with your main customer. small and large. and Feuerstein knew better. Well." And is Mozer worth this? I know both men." He said that to Gutfreund on at least two or three occasions. there's probably no legal duty to do it. you just cannot handle the world. mis-influence from information that apparently but not really answers the question "Why?" Also. made an elementary psychological mistake. 20. And being the great scientist he was. I mean the amount of elementary psychological ignorance that is out there in high levels is very significant[?]. Twenty-two [he means 18]: Mental confusion caused by information not arrayed in the mind and theory structures. And what did we learn in lesson one? Incentives really matter? Vivid evidence really works? He should've told Gutfreund. 19. brilliant lawyer. Well Feuerstein.18. he spent the rest of his life giving nervous breakdowns to dogs. "You're likely to ruin your life and disgrace your family and lose your money. Well we all know people who've flunked. And. So Feuerstein flunked elementary psychology. and he learned a helluva lot that I regard as very interesting. and they try and memorize and they try and spout back and they just. Here. Other normal limitations of sensation. I don't have time for that. That would've worked.

What happens when these standard psychological tendencies combine? What happens when the situation. So again." and so on. Well. He comes into the hive and does this incoherent dance. Skinner. there is no nectar where they're all straight up. he explained why. And you'd think the honeybee would come back to the hive and slink into a comer. in a natural setting. Examples are: • Tupperware parties. Moonie [as in Sun Myung Moon and the Unification Church] conversion methods: boy do they work.F. and they go out and get it. So commitment and consistency tendency and the contrast principle were both working in favor of this behavior. He just combines four or five of these things together. And number two. It was a false explanation. The system of Alcoholics Anonymous: a 50% no-drinking rate outcome when everything else fails? It's a very clever system that uses four or five psychological systems at once toward. [Laughter] And it's a very important part of human organization so the noise and the reciprocation and so forth of all these people who have what I call say-something syndrome don't really affect the decisions. That greatly changed the behavior of the people. decided to do an experiment. Tupperware's now made billions of dollars out of a few manipulative psychological tricks. Then we've got other common mental illnesses and declines. like B. The Milgrim experiment. judged by economic outcomes. but he doesn't. causes several of these tendencies to operate on a person toward the same end at the same time? The clear answer is the combination greatly increases power to change behavior. And then I've got development and organizational confusion from say-something syndrome. I might say. It's been widely interpreted as mere obedience. Way up. And a honeybee goes out and finds the nectar and he comes back. temporary and permanent. a little larger. he worked them up: tiny shock. he does a dance that communicates to the other bees where the nectar is. it's four different psychological tendencies. He put the nectar straight up. This is the most important question in this whole talk: 1. • • • -15- . or the artful manipulation of man. compared to the power of merely one tendency acting alone. a honeybee. a little larger. "We need this to look for scientific truth. by the way. Well some scientist who is clever. a very good end.21. It was so schlocky that directors of Justin Dart's company resigned when he crammed it down his board's throat. but the truth of the matter is that the experimenter who got the students to give the heavy shocks in Milgrim. Now the time has come to ask two or three questions. 22. and the poor honeybee doesn't have a genetic program that is adequate to handle what he now has to communicate. and all my life I've been dealing with the human equivalent of that honeybee. And he was totally right. And here my favorite thing is the bee. including the tendency to lose ability through disuse.

the top guy is sitting there. You've decided to do it. the other guy is bidding.When you get these lollapalooza effects you will almost always find four or five of these things working together. The government requires that airliners pass a bunch of tests.. so what do they do? They do it again in the afternoon. Finally the institution of the board of directors of the major American company.. Again. unfixable paralysis. you get deprival super-reaction syndrome. and they've got all these old people. I don't know. He's doing asinine things. the open-outcry auction. nobody else is objecting. when the first test is done. three. Again. and you go and you really get extreme dysfunction as a corrective decision-making body in the typical American board of directors. So McDonald-Douglas schedules one of these things in a hangar. One of my favorite cases is the McDonald-Douglas airliner evacuation disaster. That's Munger's rule. I mean there are occasional things that don't follow Munger's rule. "Cherche la femme. You'd decided to do it twice. the thing is going away . frequently happens. These are engineers. Incentive-caused bias. you're living in a different world than I am. I think it's 90 seconds or something like that. or whatever in hell they do. 2. Now they create 20 more injuries and one case of a severed spinal column with permanent. he's raising the directors fees every year. Or. Finally. They only act. If you pass you save a lot of money. they only act when it gets so bad it starts making them look foolish. You've got to jump this hurdle before you can sell your new airliner. aren't there overlaps? And can't some items on the list be derived from combinations of other items? -16- . Well the open-outcry auction is just made to turn the brain into mush: you've got social proof. make it very realistic. these are brilliant people. and in the morning. You can't select nothing but 20-year-old athletes to evacuate your airline. By the way they didn't read[?] the time schedule either. if you're the inventor of Tupperware parties. but by and large the board of directors is a very ineffective corrector if the top guy is a little nuts. or threatening legal liability to them. which. because the combination is likely to do you in. The government has rules. it's okay? Reciprocation tendency. The second question: Isn't this list of standard psychological tendencies improperly tautological compared with the system of Euclid? That is. one of them is evacuation: get everybody out. Well. and they make the hangar dark and the concrete floor is 25 feet down. he's flying you around in the corporate airplane to look at interesting plants. "] What you should search for in life is the combination. so on and so on. five of these things work together and it turns human brains into mush. you look around the board. of course. and they've got these little rubber chutes. social proof. he's an authority figure. "Look for the woman. He told you to make it realistic. in addition to causing all the injuries. When I was young there was a whodunit hero who always said. Well . 20 terrible injuries when people go off to hospitals. four. you get reciprocation tendency. I mean it just absolutely is designed to manipulate people into idiotic behavior. and they ring the bell and they all rush out. it's likely to make you enormously rich if you can stand shaving when you do it. this is thought over through in a big bureaucracy." [In French. and of course they scheduled another one for the afternoon.. again the power of incentives. it's a combination of [psychological tendencies]: authorities told you to do it.. It's some short period of time. they create. And maybe you think this doesn't happen in picking investments? If so.

because Braun knew it's complicated building an oil refinery. as a matter of fact. "Why is it important?" You got fired in the Braun company. Very clever psychological rules. Here are some examples: • One: Karl Braun's communication practices. Two: the use of simulators in pilot training. The standard practice is watch one. the consistency and commitment tendency. That's a simple discipline. they can't be simply washed out automatically and they shouldn't be. 3.S. in the practical world. At any rate. And he knew that his communication system worked better if you always told him why. no vote until the whole vote. otherwise they wouldn't be there. It can blow up . Constitutional Convention: totally secret.The answer to that is. And if you wrote a communication and left out the Why you got fired. teach one. and boy does it work. and you had to tell him Why. do one. By and large these rules of thumb. Nonetheless. You had to tell Who. Remember I said. Here. Again. is the thought system indicated by the list? Isn't practical benefit prevented because these psychological tendencies are programmed into the human mind by broad evolution so we can't get rid of them? [By] broad evolution. everybody would've been pushed into a comer by his own pronouncements and his own oratory and his own. they work pretty well for man given his limited mental capacity. And no recorded votes until the last one.. so you can regard it as kind of an evolutionary outcome.. Three: What good. but mostly genetic. He had a very simple rule. You had to have five Ws. then just one vote on the whole Constitution. And they got it through by a whisker with those wise rules. But just because they've wandered into it doesn't mean you can't invent its equivalent when you need it for a good purpose. Where and When. Five: The rules of the U. And that's why they were programmed in by broad evolution. Well the simulator is God's gift because you can keep them fresh. probably much more good than bad. I think they just wandered into it. Boy does that pound in what you want pounded in. What you wanted to do. And look at the crowd we got now. the psychological thought system described is very useful in spreading wisdom and good conduct when one understands it and uses it constructively. Four: Clinical training in medical schools: here's a profoundly correct way of understanding psychology. And that is a profoundly correct way to teach clinical medicine. again. that's certainly a constructive use of somebody understanding psychological tendencies. Three: The system of Alcoholics Anonymous. He designed oil refineries with spectacular skill and integrity. Well the answer is the tendencies are partly good and. I mean the combination of genetic and cultural evolution. yes. all kinds of things happen. and if they had a different procedure. . • • • • -17- . indeed. abilities attenuate with disuse. plainly. We wouldn't have had the Constitution if our forefathers hadn't been so psychologically acute..

But later I wised up and I realized that it was very important that they do that. they make everybody revisit their old acquisitions and wade through the presentations. You've got denial. Nine: the great example of Charles Darwin is he avoided confirmation bias. Eight: the use of post-mortems at Johnson & Johnson. and then rewarding themselves with something they really like doing. Darwin probably changed my life because I'm a biography nut. He is profoundly correct. And I said. That's not where I'm going. that's a counter-productive way to do things ordinarily for a different reason. At most corporations if you make an acquisition and it turns out to be a disaster.• • • • Six: the use of granny's rule. -18- . "They're teaching 28-year-old people that high school algebra works in real life?" We're talking about elementary probability. the more attenuated the wisdom gets. I love this. "My God. a very eminent psychologist. by all objective evidence.. here's a guy that. This stuff is wonderfully useful. I do the same thing routinely. And you can know these psychological tendencies and avoid being the patsy of all the people that are trying to manipulate you to your disadvantage. Sam Walton won't let a purchasing agent take a handkerchief from a salesman. yet there he is buried in Westminster Abbey. but it would've been even worse if! hadn't done what I did. And by the way. That is a profoundly correct way for Sam Walton to behave. Nobody even wants to even be associated with the damned thing or even mention it. You've got Pavlovian association tendency. I also found out that he wasn't very smart by the ordinary standards of human acuity. he runs around the country telling executives to organize their day so they force themselves to do what's unpleasant and important by doing that first. That is a very smart thing to do. We don't go to the closed-bid auctions too because they . At Johnson & Johnson. Seven: the Harvard Business School's emphasis on decision trees. which Zeckhauser would understand. as you can tell from listening to this talk. And so this guy. Four: What special knowledge problems lie buried in the thought system indicated by the list? Well one is paradox. • 4. is not nearly as smart as I am and he's in Westminster Abbey? He must have tricks I should learn. That is a very good system. all the paperwork and presentations that caused the dumb acquisition to be made are quickly forgotten. One of the psychologists who works for the Center gets paid a fortune running around America. Now granny's rule is you don't get the ice cream unless you eat your carrots. I said. like Sam Walton. Ten: Then there is the Warren Buffett rule for open-outcry auctions: don't go. And by the way. It didn't work perfectly. I'll tell you. Now we're talking about a type of human wisdom that the more people learn about it. When I was young and foolish I used to laugh at the Harvard Business School. But we have paradox in mathematics and we don't give up mathematics. That's an intrinsically paradoxical kind of wisdom. and better late than never. He knows how powerful the subconscious reciprocation tendency is. and when I found out the way he always paid extra attention to the disconfirming evidence and all these little psychological tricks." And I started wearing little hair shirts like Darwin to try and train myself out of these subconscious psychological tendencies that cause so many errors. and he teaches executives to manipulate themselves. Well granny was a very wise woman. I say damn the paradox.. you've got everything in the world.

I mean I never see this woman without a little lift in my spirits. "The Lord is subtle. Well.and I think Milton Friedman is in this group. 5. which is thermodynamics. were absolutely fixed. even though it's a lot of little particles interacting. but I may be wrong on that -. and she sat down next to me and she turned her beautiful face up and she said. "Charlie.. And here my model is the procession of the equinoxes.sort of like the thermodynamics model. and I'd never seen her before. is sort of a paradox in a paradox. which of course is Einstein. The world would be simpler for a long-term climatologist if the angle of the axis of the Earth's rotation." And I don't think it's going to be that hard to bend economics a little to accommodate what's right in psychology. and they have to be bent." she said. The manipulation still works even though you know you're doing it. is probably a little wrong on that. and that has pronounced long-term effects. if that's acceptable to everybody. I think Milton Friedman. "What one word accounts for your remarkable success in life?" And I knew I was being manipulated and that she'd done this before. After all. or economists are probably the ones that are bending them in the correct direction. And I've seen that done by one person to another. and I just loved it. Well in many cases what psychology is going to add is just a little wobble. But it isn't fixed. You know. And I think that these behavioral economics . Here I quote another hero of mine. what should the educational system do about it? I am not going to answer that one now. I may be demonstrating some psychological tendency I hadn't planned on demonstrating. I think the thermodynamics analogy is over-strained. who has a Nobel prize. and we're going to move it and allocate it to Charles Munger.000 years or so there's this little wobble. You'll have to judge yourself whether that's true. where he said. I like leaving a little mystery. And some economists -. but not malicious. she's married to prominent Angelino. there's nothing in thermodynamics that's inconsistent with Newtonian mechanics and gravity. How should the best parts of psychology and economics interrelate in an enlightened economist's mind? Two views: that's the thermodynamics model. gravity and laws of mechanics. compared to the plane ofthe Euclyptic. And here is this wonderful truth that you can sort of develop on your own. when you apply it to yourself. you can't derive thermodynamics from plutonium. and it will be endurable. And by the way I told her I was rational. and I think that some of these economic theories are not totally consistent with other knowledge. Over every 40. Fifth: The final question is: If the thought system indicated by this list of psychological tendencies has great value not recognized and employed. -19- . Now my prediction is when the economists take a little psychology into account that the reconciliation will be quite endurable. I think knowledge from these different soft sciences have to be reconciled to eliminate conflict.the granny's rule.. I drew this beautiful woman as my dinner partner a few years ago. Have I used up all the time so there's no time for questions? Moderator: I think that what we're going to do is we're going to borrow a little bit of time from the end of the day questions.

or one of the most important elements of your success. which I regard as a profoundly good idea. Do they multiply? Do they add? How does it work? You'd think it'd be just an automatic subject for research. And again. but it doesn't seem to tum the psychology establishment on. and you'll be given a copy along with Cialdini's book. I presumed there would be one curious man [laughter].but you didn't tell us how these tendencies affected you and what's probably the most important. the reinforcement. but don't take more than one. Munger: Audience Member #3: Munger: Out of those 24. Paul Brest. It was published in the July 1994 edition ofthe Washington Law Review. That's what Jacob Viner.an animal so bred and trained for one narrow purpose that he wasn't much good at anything else. the dean of the Stanford Law School is here today.Munger: By the way.but I don't have time for that one. I didn't want to tum it into a total obsession. Well of course an investment decision in the common stock of a company frequently involves a whole lot of factors interacting. And I'm wondering if you might relate some of these principles to some of your past decisions that way. and he wrote an article about it.it wouldn't be nearly 24. Every once in a while a micro-issue -.] Questions? Audience Member #1: Munger: Will we be able to get a copy ofthat list of24 [standard causes of human misjudgment]? Yes. the great economist called it: the truffle hound -. It is not necessarily for the good.Warren has always been very open about what he's learned. comes from being a truffle hound. and that is the reward system in a lot of academic departments. Usually. at least not very much. which was deciding where to invest your money. And I don't have too much interest in teaching other people how to get rich. and a lot of those models are microeconomic. they don't discuss how these things combine. It may be fine if you want new -20- . you get this lollapalooza effect. again. [The article Mr. simple model.you told us how you would've deal with one of these issues. because I didn't anticipate such a big crowd. there's one big. Munger is referring to is called "On Teaching Professional Judgment" by Paul Brest and Linda Krieger. That is a different set of incentives from rising in an economic establishment where the rewards system. could you tell us the one rule that's most important? I would say the one thing that causes the most trouble is when you combine a bunch of these together. and he is trying to create a course at the Stanford Law School that tries to work stuff similar to this into worldly wisdom for lawyers. and I have it and I'll put it over there on the table. if you read the psychology textbooks. I'm sure the Center is up to making other copies. and so I could do other things like give talks on the intersection of psychology and economics. Audience Member #2: If I had listened to this talk I might have thought that Charles Munger was a psychology professor operating in a business school. And that isn't because I fear the competition or anything like that -. and I share that ethos. And I have a little list of -. I think this is a man from Mars approach to psychology. And if we run short. I just reached in and took what I thought I had to have. for example with the unfortunate lady See's -. of those -. My personal behavior model is Lord Keynes: I wanted to get rich so I could be independent. of course.

-21- .drugs or something. You want people stunted in a lot of different directions so they can grow in one narrow direction. I think it's terrible. but I don't think it's good teaching psychology to the masses. In fact.

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